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The Profitable Future of Traditional Philanthropy

QUESTION: I hear there are 1,000 non-profits in Santa Barbara. I am newly retired and moved here from Chicago after selling my business. I look at an organization like the Girl Scouts which provides for a significant portion of their financial needs by selling cookies and other things. Why don’t more of these organizations find ways to create revenues to help them sustain themselves? . . . Stephen in Montecito

That is an excellent question, Stephen. I feel that this is such an important question that I hired a research assistant, Mariah Miller from UCSB, to help me research it and write this column. I believe that finding more diverse ways for these valuable organizations to sustain themselves is vital. You are right about the Girl Scouts. They generated $23 million in revenues through gross profit on merchandise compared to $15.5 million through gifts, grants and bequests in the previous fiscal year. There are other non-profits in Santa Barbara that are also using this approach. But you are also right that this approach has been grossly underutilized.

One reason frequently given is that only certain kinds of organizations and fields can use this approach. While that may be true, it doesn’t really appear to be as true as one thinks. In a study of non-profits with revenue generating approaches, they were found in the following fields: employment training, community and economic development, children and youth, rehabilitative services, homelessness, hunger and poverty, advocacy, education and research, substance abuse, elderly, health services, arts, culture, and humanities, other social services, environment and animals, religious, and disaster relief. (Powering Social Change: Lessons on Community Wealth Generation for Nonprofit Sustainability, Community Wealth Ventures, Inc., 2003.) That is quite a list. So, lots of organizations facing social problems have found a way; but, back to your question, why isn’t it utilized more?

It is not simple to create profitable revenue streams. It requires the will, the time, the expertise, the training, and the commitment of the non-profit’s board and staff. Plus, it requires the capital. It is not as simple as it was when we were kids just putting up a lemonade stand.

But, in addition, part of the challenge for non-profits is overcoming a series of myths that get in the way.

Myth #1: Working to create earned income will distract the organization from its mission.

While this can be a problem, the change in funding may actually help them be more effective in meeting their social goals. If the for-profit activities enable smoother funding and can free the non-profit from the priorities of philanthropic contributions or government grants, they can better focus on addressing their clients’ needs. When non-profits are not exclusively dependent upon fundraising, the many talented people who serve on their boards can have more time to contribute to the work of the board in other ways and these changed priorities may allow board recruitment to focus on a wider variety of skills. It can enable social change and community development.

When earned income makes non-profits more financially stable, more able to focus on their core mission and more effective at meeting their organizational goals, money donated to them will go further toward making an impact on the local community. Innovation and innovating responses are needed to address the world’s social problems and finding new ways to finance and organize our efforts in addressing them is one part of this process. Non-profits are not only aiming to develop for-profit activities in the United States, but in other countries as well including some unexpected places like China.

Myth #2: This approach is very risky.

In a study of respondents to a survey of non-profits, almost 60% were profitable within two years. (Powering Social Change, p. 58.) Yes, there is risk. But by proper planning and adequate capitalization, in many cases these risks can be reduced. It is a funny thing about risk. Funders are often caught up in a strange quagmire. The risk between capital given as a grant and capital given to create a profitable arm is a psychological conundrum. When a foundation, for example, gives a grant, it expects no return other than the service provided. Therefore, all the money is “lost”. However, when a foundation invests in a profitable arm for a non-profit, if that money is lost it is a different feeling. In investments, we expect returns. If the investment fails and the non-profit loses all the money, it is experienced as a loss. Investments open us up to loss. However, in a certain sense, if the non-profit makes any return that is more than zero, it is a huge gain and moves the organization in the direction of sustainability. Yet it doesn’t feel that way. We hate loss as human beings.

For example, “Boomtown Café is a nonprofit that launched its venture, a catering business, which generated revenue to support the early development of the nonprofit organization. Later, the catering business sustained the organization when it had to temporarily shut down operations.” (Powering Social Change, p. 64.)

If every non-profit was in the same financial position as Boomtown Café, imagine the security, self-direction and effectiveness that would result. Currently, so much time is spent raising money—what would happen if that time could be freed up to directly support the mission? How much risk is it worth to attempt that?

Myth #3: There is nowhere to learn how to do this.

Training programs to help non-profits develop for-profit activities already exist, though to the best of my knowledge there are currently no local providers in Santa Barbara County. These programs assist non-profit professionals with the skills-development needed to successfully manage this transition. They focus on developing what is known to work in creating profitable arms: a supportive culture within the non-profit with a champion for the project, a supportive board, and skills-training for staff; strategic planning with sufficient capital and initial cash flow to get the project started; and a business orientation with focus on selling, customers’ needs, managed risk-taking, and clear goals for the present and future.

So, Stephen, you asked a vital question. In my opinion we need to start a major effort to do this in Santa Barbara. In order for this to happen, local funders would have to acknowledge the myths, decide to help the organizations that are interested in pursuing this direction, and then provide the technical support needed to help them succeed.

Originally published in The Montecito Journal Vol 25 Issue #9

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Peter Brill is the founder and first Executive Director of Sustainable Change Alliance. He is also a founding board member of SCA Inc., a profit impact investing firm. In addition to serving on their board, he is exploring ways to change the conversation regarding how people think about affecting social change at the community level by launching his Discovering What Matters with Dr. Peter Brill communication campaign which includes a monthly column in the Montecito Journal as well as his Blog www.dwmblog.com.
He received his M.D. from U.C.L.A. and became a board-certified psychiatrist after his residency at the University of Pennsylvania. He also attended the Wharton School of Business where he became a Senior Fellow. He founded and directed the Center for the Study of Adult Development affiliated with the Department of Psychiatry at the University of Pennsylvania. He consulted to over 150 organizations, founded and ran two national companies, while carrying out a private practice. He is a best-selling author who has appeared numerous times on radio and television, and has also lectured internationally.
Since moving to Santa Barbara, he became the Director of the Third Age Foundation where he lectured and led groups and workshops. His latest publication is Finding Your J Spot, Joy in Midlife and Beyond. He also hosted a radio show titled The Third Age. Additionally, he has served on several boards in Santa Barbara and wasa member of Social Venture Partners where he served on the executive committee for 3 years.

To stimulate conversation about transformative social and environmental change.
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